Asia/Pacific – Japanese Prime Minister Kan survived a no-confidence vote, but pledged to resign after the majority of earthquake recovery was finished.

Toyota saw vehicle production decline 75% in April but expects output to reach 90% of normal by July and equal last year’s output for the full year. Honda indicated its North American production should reach 100% by August.

Europe-The IMF and EU were close to finalizing a new bailout package for Greece. If approved, Greece would receive an aid package worth 12 billion Euro in exchange for new spending cuts, tax increases, and pledges to accelerate privatization of government assets. The aid package would allow Greece to roll-over, or refinance, 13.7 billion Euros of short-term debt obligations. Argus Research estimates that by year-end the combination of new debts and budget deficits will drive total Greek sovereign debt close to 175% of gross domestic product. With borrowing costs at elevated levels, Greece may not be able to afford to refinance its debt at market rates. Though it may be able to put it off for another year, it seems inevitable that there will have to be some form of debt restructuring for the country. The latest Greek negotiations came as European Central Bank President suggested the creation of a euro-zone finance ministry to monitor budgetary and economic policies of the individual nations.

Germany said that it will close all of its 17 nuclear reactors by 2022 in the wake of the Japanese nuclear disaster. The announcement sparked the inevitable backlash from the country’s biggest utility companies and will undoubtedly result in ongoing heated debate about energy resources.

United States-The trend of positive employment numbers stalled in May as the economy added only 54,000 workers during the month. This was down from 232,000 in April and is the first reading in three months to be below 150,000. The economy gained an average of 210,000 jobs in March and April and averaged 148,000 over the last six months. The unemployment rate edged up to 9.1%. While we have long thought that there are structural issues that will result in an elevated unemployment level for some time, we also feel that this most recent weakness may be exaggerated because of, hopefully, temporary factors. Goldman Sachs attributes about two-thirds of the spike in jobless claims to three factors that may be temporary. The first is Japanese-related supply disruptions, which affected not only automobiles but other manufacturing areas as well. Second is the weather, with floods and tornadoes devastating much of the central U.S.   The third factor which may or may not be temporary is high gas prices. Four dollar gasoline has historically been a level that causes consumers to pull back on spending. However, pump prices have fallen about 25% since their peak in early May. Prices typically rise through June and July for the summer driving season and then decline in late summer.

Company earnings continue to be strong despite the challenging economic environment. By the end of May, 98% of Standard and Poor’s 500 companies had reported earnings for the first quarter and 68% of them beat estimates. Consensus estimates compiled by First Call indicate earnings should rise 14.5% for the second quarter versus a year ago. At the beginning of the year the estimate was for a 10.6% increase.

Moody’s Investor Services announced that they might review the Aaa debt rating for possible downgrade as early as next month. They indicated that credible progress toward a deal in Washington to cut deficits and increase the debt ceiling might forestall a downgrade. Moody’s also announced that with the implementation of the Dodd-Frank law, they felt the U.S. government will no longer go to extraordinary lengths to backstop major banks. As a result, they said they may downgrade the debt ratings of Bank of America, Citigroup, and Wells Fargo.

Financial Markets-The Standard & Poor’s 500 lost 2.3% last week and the MSCI EAFE index of international markets declined 0.1% in U.S. dollar terms. The dollar declined versus the Euro and Yen but increased versus the Pound. The ten year treasury yield fell to 3.00% while the two year yield declined to 0.43%. Gold gained 0.5% and oil declined 0.4%.

Other Economic News Last Week

-Factory orders fell.

- Consumer confidence weakened.

-New auto sales declined in May.

The following is not intended to reflect any specific investment portfolio managed by WheelerFrost Associates, Inc. or to provide investment advice. Investment recommendations made by WheelerFrost Associates, Inc. are given only on a client  by client basis in conjunction with a specific investment plan.

Current Outlook

-          We have a less constructive view of stocks, but still favor them over bonds.

-          Developed and Emerging countries appear attractive versus the U.S.

-          Commodity exposure as a hedge against commodity induced inflationary pressures.

-          Corporate and mortgage-backed bonds are favored over treasuries.

-          Municipal bonds are attractive relative to treasuries on a yield basis as investors remain unduly nervous regarding the states’ credit quality.

-          Favor State General Obligation municipal debt as well as essential services issues.

Risks

-          Higher oil prices due to Middle East turmoil and emerging country demand.

-          Potentially over-stimulative Fed policies and rising commodity prices are inflationary threats.

-          Debt levels and budget deficits in developed countries pose threats to sovereign debt.

-          Credit conditions remain challenging for individuals and small business.

-          Inflation concerns in emerging countries are forcing monetary tightening that could lead to slower global growth.

This review is compiled from various research sources and nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based on any information provided herein. While WheelerFrost Associates, Inc. has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein. Information provided reflects WheelerFrost Associates, Inc. views as of a particular time. Such views are subject to change at any point and WheelerFrost Associates Inc. shall not be obligated to provide notice of any change.

Asia/Pacific – China’s real estate bubble may be starting to deflate as residential prices have begun to decline in some major cities. Though this could temper undesired real estate speculation, it may also mean that the economy will slow more than desired with a meaningful effect on world growth. The country was further rocked by a wave of violent unrest in urban areas. The ruling party deployed massive security forces in order to contain public anger over various economic and political grievances.

Europe-Signs of continuing social discord in the peripheral Euro nations continued as Portugal’s opposition Social Democrats won a conclusive victory in the troubled country’s general election winning 39% of the vote versus the ruling Socialists’ 28%. Meanwhile, Greece kicks off its newest austerity drive this week in the midst of street demonstrations protesting current and proposed measures. However, it is far from clear that Greece will be able to meet any of the terms of a new bailout package and the European Central Bank remains vehemently opposed to any debt restructuring. Germany’s parliament voted in favor of further aid for Greece but repeated its desire to see large private sector participation in another Greek bailout package.

United States-The Wall Street Journal reports that nearly 40% of homeowners who took out home equity loans owe more than their homes are worth. This is more than twice the rate of those who did not take out second mortgages. However, U.S. households did see their net worth increase 1.2% in the first quarter from a year ago as positive stock market performance, increased savings, and debt reduction outpaced declining real estate values. Americans have made considerable progress in cutting back on their debt burdens. By restricting use of credit cards and other credit facilities and walking away from mortgages, Americans were able to reduce their total debt to 18.4% of assets in the first quarter of 2011. This is down from 21.7% two year ago, but higher than the 14.4% average during the 1990’s.

The Federal Reserve’s Beige book was released last week. The Beige book is a compendium of economic reports from the twelve Federal Reserve districts and is central to the Fed’s economic outlook and subsequent policy. This most recent report was prepared before May 27^th and will be used at the Fed’s next policy meeting June 21-22. Overall, the tone was relatively upbeat in contrast with some recent economic reports and indicated that the economy expanded the last two months with most of the districts reporting growth in manufacturing and an improving labor environment.  Only four districts reported a slower pace of growth during the survey period. Separately, Fed Chairman Bernanke said Tuesday that the economy is growing more slowly than the Fed had anticipated, but predicted that growth would pick up later this year. Bernanke said the economic recovery is “continuing at a moderate pace, albeit at a rate that is both frustratingly slow from the perspective of millions of unemployed and underemployed workers.” He further pointed out that the economy continues to recover from the worst financial crisis since the Great Depression and faces headwinds from the effects of the Japanese disaster to global pressures in commodity markets. In this environment he reiterated that “monetary policy cannot be a panacea.”   

Financial Markets-The Standard & Poor’s 500 lost 2.2% last week and the MSCI EAFE index of international markets declined 2.4% in U.S. dollar terms. The dollar rose versus the Euro and Pound, but declined versus the Yen. The ten year treasury yield fell to 2.97% while the two year yield declined to 0.40%. Gold declined 0.7% and oil declined 0.9%.

Other Economic News Last Week

-Consumer credit grew more than expected.

- The trade deficit shrank.

-Jobless claims were higher than expected.

The following is not intended to reflect any specific investment portfolio managed by WheelerFrost Associates, Inc. or to provide investment advice. Investment recommendations made by WheelerFrost Associates, Inc. are given only on a client  by client basis in conjunction with a specific investment plan.

Current Outlook

-          We have a less constructive view of stocks, but still favor them over bonds.

-          Developed countries appear attractive versus the U.S. on valuation criteria.

-          Emerging countries appear attractive versus the U.S. on growth criteria.

-          Favor commodity exposure as a hedge against commodity induced inflationary pressures.

-          Corporate and mortgage-backed bonds are favored over treasuries.

-          Municipal bonds are attractive relative to treasuries on a yield basis as investors remain unduly nervous regarding the states’ credit quality.

-          Favor State General Obligation municipal debt as well as essential services issues.

Risks

-          Higher oil prices due to Middle East turmoil and emerging country demand.

-          Potentially over-stimulative Fed policies and rising commodity prices are inflationary threats.

-          Debt levels and budget deficits in developed countries pose threats to sovereign debt.

-          Credit conditions remain challenging for individuals and small business.

-          Inflation concerns in emerging countries are forcing monetary tightening that could lead to slower global growth.

This review is compiled from various research sources and nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based on any information provided herein. While WheelerFrost Associates, Inc. has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein. Information provided reflects WheelerFrost Associates, Inc. views as of a particular time. Such views are subject to change at any point and WheelerFrost Associates Inc. shall not be obligated to provide notice of any change.

Asia/Pacific – China’s annual inflation rate was 5.5% in May, up from 5% in April and the fastest pace in 34 months. The country’s central bank again raised commercial banks’ required reserve ratio by half a percent in an effort to slow lending and clamp down on inflation pressures. This was the sixth increase this year. 

Europe-Greek bailout plans were set back over the weekend as EU finance ministers delayed approving a $17 billion package scheduled for July. The package was part of the original $154 billion bailout approved last year by the EU and IMF. By withholding funding, the EU ministers are hoping to pressure Greece into adopting stricter austerity measures involving higher taxes and bigger spending cuts. But, without the aid, Greece is increasingly likely to default on a debt payment due in mid July. The credit default swap market is pricing in a 78% probability of default. Greek Prime Minister George Papandreou is asking Parliament to support the austerity package, but his government must first survive a vote of confidence scheduled for Tuesday of this week. As the governments of two other troubled Euro nations, Portugal and Ireland, have already fallen, his odds may not be that high. If he fails the confidence vote, a general election would need to be held later in the summer. A win in the confidence vote would likely be a market positive, while a loss would have negative consequences. Moody’s Investor Services warned that it may downgrade the credit ratings on major French banks because of their high exposure to Greek debt.

United States-The Leading Economic Index (LEI) rebounded 0.8% in May, significantly above the consensus expectation of 0.3%. Eight of the ten components made positive contributions with the strongest being the interest rate spread, consumer expectations, and building permits. On a year-over-year basis, the LEI is up 5.2%, more than double its long-term average, but below the peak of 11.5% reached in March 2010. According to the Conference Board which publishes the index, the LEIs “point to expanding economic activity in the coming months.” But, high gas and food prices and a weak housing market could make the expansion “choppy.” Excluding autos, May’s industrial output was the strongest this year and auto production is scheduled to surge 24% in July. Consumer prices rose 0.2% in May from the previous month and were 3.6% higher than a year ago. Core inflation, excluding energy and food prices, rose 0.3% for the month and 1.5% over the last year. This increase in the core rate remains at the low end of the Fed’s target.

According to a survey of economists by the Wall Street Journal, the biggest threat to the U.S. economic expansion is the potential for a persistent slowdown in hiring. The job market has not been robust this cycle to begin with, but expectations are being ratcheted down. They now forecast 2.2 million new jobs over the next twelve months compared to last month’s forecast of 2.5 million. The good news for workers is that companies are starting to restore 401(k) matching contributions after cutting them during the recession. Also, a survey by the Business Roundtable indicated that the majority of chief executives at America’s largest companies continue to expect higher sales during the second half of the year and most intend to increase hiring and capital expenditures. However, they are reducing their forecasts for economic activity.

Budget talks continue with lawmakers meeting three times last week to negotiate a deal on the debt ceiling. Word is they are trying to agree on ways to cut $4 trillion from the budget over the next ten years. It is rumored that Medicaid is expected to be the biggest source of cuts to entitlement spending in whatever compromise emerges. A potential major game changer is that the American Association for Retired Persons (AARP) has dropped their long-standing opposition to cuts in Social Security benefits.

Financial Markets-The Standard & Poor’s 500 gained 0.1% last week and the MSCI EAFE index of international markets declined 1.0% in U.S. dollar terms. The dollar rose versus the Euro, was unchanged versus the Pound, but declined versus the Yen. The ten year treasury yield fell to 2.94% while the two year yield declined to 0.38%. Gold rose 0.4% and oil declined 6.3%.

Other Economic News Last Week

-Retail sales declined less than expected in May.

- Industrial production rose.

-Housing starts were higher than expected.

The following is not intended to reflect any specific investment portfolio managed by WheelerFrost Associates, Inc. or to provide investment advice. Investment recommendations made by WheelerFrost Associates, Inc. are given only on a client  by client basis in conjunction with a specific investment plan.

Current Outlook

-          We have a less constructive view of stocks, but still favor them over bonds.

-          Developed countries appear attractive versus the U.S. on valuation criteria.

-          Emerging countries appear attractive versus the U.S. on growth criteria.

-          Favor commodity exposure as a hedge against commodity induced inflationary pressures.

-          Corporate and mortgage-backed bonds are favored over treasuries.

-          Municipal bonds are attractive relative to treasuries on a yield basis as investors remain unduly nervous regarding the states’ credit quality.

-          Favor State General Obligation municipal debt as well as essential services issues.

Risks

-          Higher oil prices due to Middle East turmoil and emerging country demand.

-          Potentially over-stimulative Fed policies and rising commodity prices are inflationary threats.

-          Debt levels and budget deficits in developed countries pose threats to sovereign debt.

-          Credit conditions remain challenging for individuals and small business.

-          Inflation concerns in emerging countries are forcing monetary tightening that could lead to slower global growth.

This review is compiled from various research sources and nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based on any information provided herein. While WheelerFrost Associates, Inc. has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein. Information provided reflects WheelerFrost Associates, Inc. views as of a particular time. Such views are subject to change at any point and WheelerFrost Associates Inc. shall not be obligated to provide notice of any change.

Europe- It was a lively week in Europe as Greek Prime Minister George Papandreou reshuffled his cabinet and survived a confidence vote in Parliament and now faces the task of getting the newest austerity measures passed in order to receive the latest round of bailout funding and forestall imminent default.   Moody’s Investor Services threatened to downgrade 13 Italian banks because of their Greek debt exposure. This following the prior week’s warning that it could cut Italy’s sovereign debt rating. 

Yields on ten year Italian government bonds reached their highest spread versus German bonds in the euro era. Worldwide, investors remained concerned that the Greek austerity vote fails and sets off a domino effect where bailout funds are withheld, Greece defaults, European banks and other peripheral euro countries come under further stress and the survival of the euro zone is in peril.

United States- Following a two day meeting, the Federal Reserve’s Federal Open Market Committee (FOMC) unanimously voted to leave the Fed Funds rate unchanged at 0.00% to 0.25%. They plan to conclude the $600 billion treasury purchase program known as QE2 at the end of June as planned. However, they will continue reinvesting cash flows from the portfolio for the foreseeable future. An end date for the reinvestments was not discussed. The official statement reiterated that current conditions “are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” Further, the statement points out that the economic recovery has been progressing “somewhat more slowly” than the Committee had expected, due in part to temporary factors such as rising food and energy prices and supply-chain disruptions from the Japanese earthquake, but that the recovery is “continuing at a moderate pace.” They also reduced their expectations for economic growth during 2011 to a range of 2.5% to 3.0%.

In the press conference following the FOMC meeting, Chairman Bernanke elaborated on several points. 1) Slower projected growth after 2011 is probably due to long-term factors, namely weakness in the financial and housing sectors of the economy. 2) The “extended period” language in the official statement means the FOMC is at least 2-3 meetings away from any change in economic policy. 3) Economic data will determine when the QE2 exit will begin and how rapid it will be. Ceasing the reinvestment of portfolio cash flows will be the first step. 4) Low and falling inflation or a significant risk of deflation could trigger a QE3. But that would take time to develop, so don’t expect it soon. 5) U.S. banks have small direct exposure to financial risks related to Euro-Zone periphery countries, but some money market funds may have more significant, indirect exposure.

Commodities- Twenty eight countries, including the U.S., agreed to release 60 million barrels of oil from strategic oil reserves over the next month in an effort to force oil prices lower and support the world economy. The move is rare and the U.S. said it was meant to replace the oil production lost because of the Libyan conflict and to increase supplies during the summer driving season. The move was also a response to OPEC’s refusal to accept a Saudi proposal to increase supply. Some producers, including Saudi Arabia have said that they will unilaterally increase supplies.  

Financial Markets- The Standard & Poor’s 500 lost 0.2% last week and the MSCI EAFE index of international markets declined 0.8% in U.S. dollar terms. The dollar rose versus the Euro and the Pound, but declined versus the Yen. The ten year treasury yield fell to 2.87% while the two year yield declined to 0.34%. Gold fell 1.5% and oil declined 2.1%.

Other Economic News Last Week

-New home sales were higher than expected.

-Durable goods orders topped consensus estimates.

-First Quarter GDP growth was revised up to 1.9% from 1.8%.

The following is not intended to reflect any specific investment portfolio managed by WheelerFrost Associates, Inc. or to provide investment advice. Investment recommendations made by WheelerFrost Associates, Inc. are given only on a client  by client basis in conjunction with a specific investment plan.

Current Outlook

-          We have a less constructive view of stocks, but still favor them over bonds.

-          Developed countries appear attractive versus the U.S. on valuation criteria.

-          Emerging countries appear attractive versus the U.S. on growth criteria.

-          Favor commodity exposure as a hedge against commodity induced inflationary pressures.

-          Corporate and mortgage-backed bonds are favored over treasuries.

-          Municipal bonds are attractive relative to treasuries on a yield basis as investors remain unduly nervous regarding the states’ credit quality.

-          Favor State General Obligation municipal debt as well as essential services issues.

Risks

-          Higher oil prices due to Middle East turmoil and emerging country demand.

-          Potentially over-stimulative Fed policies and rising commodity prices are inflationary threats.

-          Debt levels and budget deficits in developed countries pose threats to sovereign debt.

-          Credit conditions remain challenging for individuals and small business.

-          Inflation concerns in emerging countries are forcing monetary tightening that could lead to slower global growth.

This review is compiled from various research sources and nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based on any information provided herein. While WheelerFrost Associates, Inc. has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein. Information provided reflects WheelerFrost Associates, Inc. views as of a particular time. Such views are subject to change at any point and WheelerFrost Associates Inc. shall not be obligated to provide notice of any change.

The Debt Ceiling and Budget- Last week both Moody’s and Standard and Poor’s threatened to lower the credit rating on U.S. debt if meaningful progress isn’t made on the budget and debt ceiling issues. Moody’s cited “the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury obligations.” Without getting on too big of a soap box, let me point out that since World War II revenue to the government has averaged about 18% of Gross Domestic Product (GDP) per year. However, spending has averaged 20% of GDP per year. Thus, on average, we have had a budget deficit each year since the 1940’s that averages about 2% of GDP. Individual years vary, of course, but balanced budgets have been extremely rare. For example, during recessionary years revenues tend to decline while expenditures increase. In expansions revenues rise rapidly, though expenditures rarely decline. Another characteristic is that revenues are more volatile than expenditures because of the non-discretionary nature of a large chunk of government spending. During recessions revenues often decline dramatically, over 15% most recently, while expenditures have not declined more than 3% over a twelve month period since the mid 1960’s. Over the twelve months ending in June, federal receipts have grown 8.8% while outlays have increased 3.3%. This result was achieved during a period of disappointing, though positive, economic expansion. If the economy was more robust revenues would have increased more dramatically. Each year we borrow to finance the deficit and that borrowing then gets added to the accumulated debt of the country. The concept of a debt ceiling came into being during World War I in order to limit debt build-up during the war. It has been argued by many observers that a mandatory debt limit doesn’t make much sense, and in fact many countries don’t have one. Normally, the debt ceiling is raised without much controversy, but on occasion there has been political battle over the issue. Also, the battle lines shift. For example, as a Senator, President Obama voted against raising the debt ceiling in 2006 while many in the current republican leadership voted in favor.

The current debt ceiling “crisis” is really a combination of the need to raise the statutory debt limit in order for the government to continue to pay its bills and the more fundamental and philosophical battle over the budget and its long-term implications. The debt ceiling “crisis” could be dealt with temporarily by simply raising the ceiling. However, chronic budget deficits will ensure that it will become an issue again in the future. The budget problem is long-term in nature and is centered on non-discretionary and entitlement spending. According to Raymond James & Associates, if congress left Medicare, Social Security, and defense spending untouched and cut all other expenditures to zero, we would still have a budget deficit this year. As the baby boom generation retires, this problem will only be exacerbated, especially spending on Medcare.

There is a misconception by some that if the debt ceiling is not raised the government would be prevented from spending more than it receives. But that is not how the budget process works. To a large degree, the money has already been allocated. If the ceiling is not raised the government would likely continue to make interest payments on debt in order not to default. Other payments, such as Medicare, Social Security, and veterans’ benefits, would likely be delayed, but eventually paid. Contractors may not be paid in a timely fashion and government workers likely sent home, though eventually paid whether they worked or not. The current stalemate with the debt ceiling used as a bargaining tool risks the credit rating of the country and that seems a risk not worth taking.     

Financial Markets- The Standard & Poor’s 500 lost 2.1% last week and the MSCI EAFE index of international markets declined 2.7% in U.S. dollar terms. The dollar rose versus the Euro and was flat versus the Pound, but declined versus the Yen. The ten year treasury yield fell to 2.91% while the two year yield declined to 0.36%. Gold rose 3.0% and oil declined 0.5%.

Other Economic News Last Week

-The trade deficit widened more than expected.

-Retail sales were slightly higher in June.

-The consumer price index declined 0.2% in June and the producer price index fell 0.4%.

-Eight European banks failed the EU stress tests.

The following is not intended to reflect any specific investment portfolio managed by WheelerFrost Associates, Inc. or to provide investment advice. Investment recommendations made by WheelerFrost Associates, Inc. are given only on a client  by client basis in conjunction with a specific investment plan.

Current Outlook

-          We are maintaining a “neutral” view of stocks with a cautious outlook, given the uncertainties arising from the budget standoff in the U.S. and the sovereign debt crisis in Europe.

-          Developed countries appear attractive versus the U.S. on valuation criteria.

-          Emerging countries appear attractive versus the U.S. on growth criteria.

-          Favor commodity exposure as a hedge against commodity induced inflationary pressures.

-          Corporate and mortgage-backed bonds are favored over treasuries.

-          Municipal bonds have rallied substantially from panic induced levels earlier in the year but remain relatively attractive compared to treasuries.

-          Favor State General Obligation municipal debt as well as essential services issues.

Risks

-          Higher oil prices due to Middle East turmoil and emerging country demand.

-          Potentially over-stimulative Fed policies and rising commodity prices are inflationary threats.

-          Debt levels and budget deficits in developed countries pose threats to sovereign debt.

-          Credit conditions remain challenging for individuals and small business.

-          Inflation concerns in emerging countries are forcing monetary tightening that could lead to slower global growth.

-          Renewed housing weakness threatens to weaken an already weak recovery.

This review is compiled from various research sources and nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based on any information provided herein. While WheelerFrost Associates, Inc. has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein. Information provided reflects WheelerFrost Associates, Inc. views as of a particular time. Such views are subject to change at any point and WheelerFrost Associates Inc. shall not be obligated to provide notice of any change.

Greek Bailout- Last week euro-zone leaders agreed on a second rescue package for Greece that provides the country with much needed cash while placing some of the bailout’s burden on Greece’s private creditors. Through extensions of debt maturities and reductions in interest rates, the plan seeks to reduce the debt servicing burden of the country and allow it more time to work its way out of the hole it dug for itself. The EU will take on more responsibility for Greece’s debts and Greece consequently won’t have to go to the capital markets for funding for some years. Essentially the plan is a bond exchange program that converts all of Greece’s bond obligations for the next several years into loans from the European Financial Stability Facility (EFSF). Holders of Greek bonds to the tune of 135 billion euro’s will have to accept new securities that give them less than originally promised. Maturities on these new loans will be extended to between 15 and 30 years with a grace period of 10 years and the interest rate paid will be reduced. Also, the EFSF will have the ability to enter the secondary market and buy bonds in order to stabilize conditions. The plan effectively frees Greece from having to seek funding in the bond market until 2016 or 2017, if all goes according to plan. The EFSF plans to implement similar terms for Ireland and Portugal. The plan also allows for faster methods of disbursing credit lines to Italy and Spain and for bank recapitalizations, if necessary.  

The structure of the deal has several moving parts, but essentially a holder of short-term Greek debt will have the option of keeping the face value of the bond and extending the maturity or taking a 20% reduction to the face value of the bond and extending the maturity, but earning a higher interest rate. For example, the holder of a Greek bond maturing in 2012 could do any of the following: extend the maturity to 30 years at a 4.5% interest rate; take a 20% reduction in the value of the bond and extend the maturity to 15 years at a 5.9% interest rate; or take a 20% reduction in value and extend the maturity to 30 years at a 6.42% interest rate. The principal of the new 30 year bonds will be collateralized by 30 year AAA rated zero coupon bonds that Greece will purchase with bailout funds. At maturity, these bonds will provide the proceeds to repay the investor. In the meantime, Greece makes interest payments to the investor on the new securities as well as to the bailout fund on the money used to purchase the zero coupon bonds. The new 15 year bonds will be partially backed by escrowed funds.

This is a liquidity solution not a solvency solution. It relieves the immediate pressure, transfers some responsibility to the eurocrats, and gives Greece some breathing room to tackle its austerity measures and privatization targets. But those measures need to be successful and the country’s balance sheet and economy strengthened, or there will be another debt crisis in a few years. What it doesn’t do is significantly reduce the amount of debt in the system. The bond exchange program will cut about 26 billion euro from Greece’s overall 350 billion euro debt load. In the end Europe now has a lot more skin in the game and would be reluctant to allow the efforts to fail.

Financial Markets- The Standard & Poor’s 500 gained 2.2% last week and the MSCI EAFE index of international markets increased 3.4% in U.S. dollar terms. The dollar fell versus the Euro, the Pound, and the Yen. The ten year treasury yield increased to 2.96% while the two year yield rose to 0.39%. Gold rose 1.0% and oil increased 1.4%.

Other Economic News Last Week

-Housing starts jumped nearly 15% in June from May’s level.

-The Philadelphia Fed’s General Activity Index was stronger than expected.

-The Conference Board’s index of Leading Economic indicators advanced in June.

The following is not intended to reflect any specific investment portfolio managed by WheelerFrost Associates, Inc. or to provide investment advice. Investment recommendations made by WheelerFrost Associates, Inc. are given only on a client  by client basis in conjunction with a specific investment plan.

Current Outlook

-          We are maintaining a “neutral” view of stocks with a cautious outlook, given the uncertainties arising from the budget standoff in the U.S. and the sovereign debt crisis in Europe.

-          Developed countries appear attractive versus the U.S. on valuation criteria.

-          Emerging countries appear attractive versus the U.S. on growth criteria.

-          Favor commodity exposure as a hedge against commodity induced inflationary pressures.

-          Corporate and mortgage-backed bonds are favored over treasuries.

-          Municipal bonds have rallied substantially from panic induced levels earlier in the year but remain relatively attractive compared to treasuries.

-          Favor State General Obligation municipal debt as well as essential services issues.

Risks

-          Higher oil prices due to Middle East turmoil and emerging country demand.

-          Potentially over-stimulative Fed policies and rising commodity prices are inflationary threats.

-          Debt levels and budget deficits in developed countries pose threats to sovereign debt.

-          Credit conditions remain challenging for individuals and small business.

-          Inflation concerns in emerging countries are forcing monetary tightening that could lead to slower global growth.

-          Renewed housing weakness threatens to weaken an already weak recovery.

This review is compiled from various research sources and nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based on any information provided herein. While WheelerFrost Associates, Inc. has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein. Information provided reflects WheelerFrost Associates, Inc. views as of a particular time. Such views are subject to change at any point and WheelerFrost Associates Inc. shall not be obligated to provide notice of any change.

August Review- August was a very busy month for news and an exceptionally turbulent month for markets world-wide. The month began with a debt ceiling deal hammered out after much contention and finally agreed to on July 31^st, just days before the August 2^nd debt ceiling deadline. However, the deal resulted in a commitment to cut spending by only $2.1 trillion over the next decade and left the tricky issues of entitlement and tax reform off the table. It was feared that this agreement would not be enough to satisfy Standard and Poor’s who had stated that they would require something more like $4 trillion in cuts to maintain the AAA rating on U.S. Treasury debt. Many observers felt that S&P would delay any rating decision until after the congressional panel set up to analyze and provide possible remedies to the debt problem had announced their recommendations. However, on the evening of August 8^th S&P went ahead and downgraded the U.S. to AA+. Moody’s and Fitch, the two other major rating agencies did not follow suit and, in fact, reaffirmed the triple A rating for the U.S. The stock market reacted badly to the downgrade and continued to deteriorate throughout the month until the last week and a half.

Market conditions were further deflated by the ongoing failure of officials to present credible solutions to the problems plaguing Eurozone sovereign debt and the consequent stress on European banks.  The biggest investor complaint is that they don’t feel that European officials fully appreciate the severity of the region’s situation and, as a result, have failed to adequately address fiscal and monetary remedies. Officials continue to bicker among themselves and policy implementation has been delayed. For example, we are still waiting for the July 21^st summit decisions to get implemented. Meanwhile, German Chancellor Merkel is at risk of her governing coalition falling apart and may have to call for elections. Sovereign credit worries continue to spread from the fringe economies to the larger peripheral economies of Spain and Italy and threaten the core economies of France and Germany. In fact, France has been subject to downgrade rumors during the month. Closely tied to the European sovereign debt problems are concerns about the health of the region’s major banks as they are large holders of sovereign debt. As prices for debt fall in the secondary markets, concerns mount regarding the adequacy of the banks’ capital. These concerns also escalated during the month and added to the skittishness of investors.

Overall, economic data released during August was not only weak, but generally weaker than expected around the globe. This, coupled with the S&P downgrade of U.S. treasury debt and the ongoing problems in Europe, led to a wild ride for stock and bond investors. The Standard & Poor’s 500 stock index was down 14.8% at one point during the month, but rallied back in the last week-and- a- half to lose “only” 5.7% for the month after investors decided that the panic had been overdone. In the bond market, in what must rank as one of the best examples of the old maxim that the market tends to prove the maximum number of people wrong at any given time, treasury prices rose dramatically as yields fell even in the face of a credit downgrade. Basically, the ongoing crisis in Europe trumped any concern about credit quality here as investors flocked to the “safe haven” of good old U.S treasury bonds. Barclay’s index of all treasury debt had a total return for the month of 2.8% and the index of 20+ year maturity treasury debt returned 10.0%! At this point, though, treasury yields are so low that they seem unable to compensate for any reasonable future inflationary scenario and are destined to lose money on a “real” after inflation basis.

The following is not intended to reflect any specific investment portfolio managed by WheelerFrost Associates, Inc. or to provide investment advice. Investment recommendations made by WheelerFrost Associates, Inc. are given only on a client  by client basis in conjunction with a specific investment plan.

Current Outlook

-          We are maintaining a cautious outlook toward stocks, given the uncertainties arising from the ongoing economic stresses in the U.S. and the sovereign debt crisis in Europe.

-          Other developed countries appear attractive versus the U.S. on valuation criteria.

-          Emerging countries appear attractive versus the U.S. on growth criteria.

-          Favor commodity exposure as a hedge against commodity induced inflationary pressures.

-          Corporate and mortgage-backed bonds are favored over treasuries.

-          Municipal bonds have rallied substantially from panic induced levels earlier in the year but remain relatively attractive compared to treasuries.

-          Favor State General Obligation municipal debt as well as essential services issues.

Risks

-          Higher oil prices due to Middle East turmoil and emerging country demand.

-          Potentially over-stimulative Fed policies and rising commodity prices are inflationary threats.

-          Debt levels and budget deficits in developed countries pose threats to sovereign debt.

-          Credit conditions remain challenging for individuals and small business.

-          Inflation concerns in emerging countries are forcing monetary tightening that could lead to slower global growth.

-          Renewed housing weakness threatens to weaken an already weak recovery.

This review is compiled from various research sources and nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based on any information provided herein. While WheelerFrost Associates, Inc. has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein. Information provided reflects WheelerFrost Associates, Inc. views as of a particular time. Such views are subject to change at any point and WheelerFrost Associates Inc. shall not be obligated to provide notice of any change.

September Review-September wrapped up a thoroughly forgettable quarter as the Standard and Poor’s 500 lost 7.0%, including dividends, for the month and 13.9% for the quarter. Foreign markets fared even worse as the MSCI EAFE index lost 9.5% during the month in dollar terms and 19.0% for the quarter. As a result, panicked investors withdrew more than $87 billion from U.S. mutual funds, the most outflows since the depths of 2008. According to Ned Davis Research, since World War II, quarterly price declines in excess of 14% are followed by a gain in the following quarter 89% of the time. The average gain in such quarters has been 5.3%. Any further signs that the U.S. might manage to avoid a new recession should limit the downside to a market that had fallen nearly 20% at its nadir. It helps that the U.S. is not burdened with liquidity demands or tight fiscal policies and, since we are only a little more than two years removed from the worst recession since the 1930’s, there isn’t much in the way of economic excesses built up that need correcting.

The ongoing distress in Europe trumped any concerns about U.S. debt levels and credit quality and investors continued to flock to the safe haven of the U.S. Treasury market in September forcing the yield on the 10 year Treasury bond down to 1.93% at month-end. Since bond prices move up when yields decline, it was a very good quarter for bonds, particularly Treasury bonds. According to “Barrons” it was the best quarter for Treasuries on record. The 10 year Treasury bond produced a 2.8% total return during September and 11.9% for the quarter. According to data from the Federal Reserve Bank of St. Louis and Yale professor Robert Shiller, the yield has never been below 1.95% on a monthly basis and has been at 2.0% or lower only 0.2% of the time since 1871! Based on history, the probability of the yield going much lower would seem to be remote, but then we have never had a Fed so determined to keep the yield low. With the Consumer Price Index having advanced 3.8% over the twelve months ending August, the real yield on the 10 year Treasury ended the month at -1.87%. As we invest for the long-term, not just a quarter, and we are extremely uncomfortable committing client assets to an investment that is highly likely to produce a negative return after inflation, we will continue to favor corporate, mortgage-backed, select foreign bonds and, where appropriate, municipal bonds for the fixed-income portion of our portfolio allocations.

Outside of the continuing European drama, the biggest event in September was the Federal Reserve’s announcement of “Operation Twist.” Under this program, the Fed will sell securities from its portfolio that have maturities of 3 years or less and use the proceeds to buy maturities between 6 – 30 years. The goal of the program is to lower long-term rates in order to incentivize risk taking and support the mortgage market as mortgage rates are tied to longer term Treasury rates. The program was widely anticipated but is more extensive in a few aspects. The market anticipated a $300 billion but the Fed announced a $400 billion program. The allocation to the 20 – 30 year maturity range is bigger than expected. The announced allocation amounts to about 90% of the planned new issuance of the 30 year bond, though the Fed won’t buy more than 35% of any given issue. Finally, they surprised market participants by announcing that principal and interest payments from the Fed’s mortgage-backed securities portfolio will be reinvested in mortgages rather than Treasuries as had been the practice.

The key to investment success in the immediate future remains in Europe. Investors’ actions have been driven by headlines and rumors and will continue to be guided by how they think the situation will unfold. Probably, the best that we can hope for is that the European authorities can somehow navigate the Byzantine rules, regulations, and political realities of the Eurozone and stabilize the sovereign debt crisis, get the countries back on track for economic growth in the subdued range of 2%-3%, all while developing achievable plans to reduce government debt going forward beyond the crisis. Until then, it is likely that we will continue to experience violent daily swings in market prices as investors continue to be torn between reasonably valued stocks and the uncertainty caused by Europe’s debt contagion and the wide range of possible policy responses.

The following is not intended to reflect any specific investment portfolio managed by WheelerFrost Associates, Inc. or to provide investment advice. Investment recommendations made by WheelerFrost Associates, Inc. are given only on a client  by client basis in conjunction with a specific investment plan.

Current Outlook

-      We are maintaining a cautious outlook toward stocks, given the uncertainties arising from the ongoing economic stresses in the U.S. and the sovereign debt crisis in Europe.

-      Developed countries appear attractive versus the U.S. on valuation criteria.

-      Emerging countries appear attractive versus the U.S. on growth criteria.

-      Favor commodity exposure as a hedge against commodity induced inflationary pressures.

-      Corporate and mortgage-backed bonds are favored over Treasuries.

-      Municipal bonds have rallied substantially from panic induced levels earlier in the year but remain relatively attractive compared to Treasuries.

-      Favor State General Obligation municipal debt as well as essential services issues.

Risks

-      Higher oil prices due to Middle East turmoil and emerging country demand.

-      Debt contagion to other core European countries.

-      Potentially over-stimulative Fed policies and rising commodity prices are  inflationary threats.

-      Debt levels and budget deficits in developed countries pose threats to sovereign debt.

-      Credit conditions remain challenging for individuals and small business.

-      Inflation concerns in emerging countries are forcing monetary tightening that could lead to slower global growth.

This review is compiled from various research sources and nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based on any information provided herein. While WheelerFrost Associates, Inc. has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein. Information provided reflects WheelerFrost Associates, Inc. views as of a particular time. Such views are subject to change at any point and WheelerFrost Associates Inc. shall not be obligated to provide notice of any change.